Question

Professional Service Organizations"

You have been asked by the CFO of the company where you work or previously worked to evaluate the use of a professional service organization for processing the company’s payroll. Identify the top-three issues that should be discussed when considering contracting the services of a payroll service provider. Evaluate the impact, both positive and negative, of each issue on the process in question. Provide specific examples to support your response.

• Using the information from the e-Activity, identify the key elements of a plan to outsource your firm’s payroll function. For each element of the plan, describe the impact of each element. Be sure that the elements address the necessary controls needed to safeguard your firm’s personnel data. Provide specific examples to support your rationale.

Answer 1

In simple words, Payroll can refer to the process of actually calculating and distributing wages and taxes. In other words, Payroll is the total of the compensation a company pays to its employees. On the income statement, payroll expenses are part of labor costs. They include employee salaries, employer payments for health insurance or similar benefits, payroll taxes paid by the employer, bonuses, commissions and similar expenses.

Follwing are the top three issues that should be considered while contracting the services of a payroll service provider:-

(1.) Accountability -- Errors in book keeping as they relate to tax issues put many businesses in trouble every year. In fact, according to an article by Inc.com, the IRS penalizes about one out of three business owners for payroll errors. It’s the top pitfall of conducting payroll processing in house because every year, federal, state and city notices, levies and changes increase the likelihood of errors if we are not immersed in the world of payroll every day. Also, a certified payroll professional company can work with tax authorities if problems with tax penalties or interest arise to give you additional peace of mind.

(2.) Expertise -- An experienced payroll provider will cover all our business needs including web-based and traditional payroll processing, employee time and attendance solutions, and other HR services, such as employee screening, background checks, and hiring and termination best practices. The options are endless, but a good payroll professional will also work with our business to understand what combination of services will be the right fit. For example, if we might want to offer paycards as a method of payment if many are under- or un-banked employees on our payroll.

(3.) Savings -- The valuable time and energy we spend figuring out how much money we have to give away could be spent actually making money. Even if we are a very hands-on business owner, keeping up with payroll processing, quarterly reports and constantly changing federal and state taxes can be a full-time job. Working with a professional payroll provider may be the best investment we’ve ever made.

Positive impact of payroll service

• It's a Time Saver - Outsourcing payroll saves a business time it would otherwise spend calculating pay and deductions and remitting checks to employees and taxation authorities. The printing costs of pay stubs might also be reduced. Some payroll companies offer a clock in/out function for employees, so you also save time calculating how many hours are owed each pay period. A company also provides services such as direct deposit and online pay stubs to further ease the payroll burden.

• It Calculates Taxes Accurately - Small business owners know the deductions involved with employee payroll can be complicated, state and federal taxes among them. A payroll company often is better equipped to calculate these deductions accurately and consistently. The company also ensures taxes are paid on time.

Negative impact of payroll service

• The Wrong Company Can Produce Errors - A payroll company that has never dealt with unique aspects of a company's payroll, such as unionization and restaurant employee tips, can introduce errors into the payroll unknowingly, and undoing the mistakes can be costly and an administrative headache. A payroll company that does not have an interface that allows businesses to enter their employees' hours directly and therefore requires the payroll company to input the information which can introduce mistakes in pay through simple human error.

• Business Owners Ultimately are Responsible - If a company fails to pay the taxes the business owes on time and accurately, the business still is responsible for those taxes. Even if the IRS prosecutes the payroll company for not properly handing over the tax money, the business might be left owing taxes to the IRS after having paid money to the payroll company. This might be the case if the payroll company has an unscrupulous employee with the ability to embezzle funds. The IRS recommends all companies use the Electronic Federal Tax Payment System so tax payments are properly made on their behalf, according to "Forbes" magazine.

• Paying for Services Businesses Don't Need - Many payroll companies offer other services and entice businesses to subscribe to them by offering all-inclusive packages. This increases the cost of outsourcing payroll, and it's possible the additional services offered are not of true benefit to the business. Outlining what a business is looking for in a payroll company before seeking a service provider makes the business better armed against such a sales pitch.

Examples

An automated, or computerized, payroll system can be stand-alone software or payroll software integrated with human resources and accounting features. From our work site, we enter our employees’ payroll data in the system including personal information such as Social Security number and address and salaries, work hours, pay rate and tax-withholding information. The software calculates paychecks based on the data we entered and enables payment by live check, direct deposit and pay cards. With an automated timekeeping system, we can input the hours into payroll software. Payroll software withholds taxes from our employees’ wages and calculates complex items such as wage garnishment, supplemental wages and pretax deductions. The software we track specific employee benefits, print payroll registers and tax reports and perform W-2 processing. This system improves efficiency and accuracy over manual systems.

A payroll service is an external system. For a fee, we outsource our payroll tasks to the provider. Depending on our needs, the provider either processes our entire payroll, including our payroll tax matters, or manages some aspects of our payroll. Payroll companies generally offer online services, and some offer a do-it-yourself approach: We can run payroll from our mobile phone or office and print our own paychecks, if we wish. Instead of having to buy software, we use the supplier’s online system. Other payroll companies offer more limited online services. For instance, we upload our employees’ hours in the supplier’s system, while the supplier processes our entire payroll and forwards the paychecks to us. This system can save time and money and help we reduce penalties for mistakes in wage, hour and tax calculations, because the provider generally has experts in those fields. We still must verify the provider’s work and stay informed about payroll matters, because we could be held liable for the provider's mistakes.

The U.S. Small Business Administration recommends taking certain steps to help we establish our payroll system. This includes obtaining an employer identification number, determining whether state and local governments require identification numbers, knowing the difference between employees and independent contractors, choosing a pay period that complies with state law and selecting the right payroll system.

Payroll Outsourcing means exporting some or all of our payroll administration to a specialist third-party organization. The payroll package we choose will integrate with our existing business infrastructure, including our HR department, and deliver its services each pay cycle. Depending on the needs, a firm may customize the payroll services that they outsource, while retaining control of other aspects. The payroll functions typically outsourced includes:-

• Running payroll and making employee pay and withholding calculations.
• Depositing funds directly or issuing checks to employees.
• Calculating state and federal payroll taxes, and making tax withholding payments.
• Filing required government reports.
• Administering employee benefits.
• Withholding social security and pension contributions.

Payroll outsourcing is simply the use of a service provider to handle the administrative and compliance functions of paying employees. It is important to note that payroll services are only that, and do not offer a local employer of record for the foreign company. This means that local incorporation is still required, and the other aspects of employing workers must be handled DIY or by other experts. Company choose different oytsource payroll for several reasons:-

• Cost savings by avoiding the need to use in-house resources to comply with complex payroll requirements.

• Ease of ongoing administration of payroll through changes in personnel, reduction or increase in compensation structure and filing of reports to government authorities.

• Avoiding mistakes and tax compliance penalties.

• If using a GEO service in a foreign country, no need to establish legal entity to run a compliant payroll.

Advantages

The advantages of outsourcing payroll for both small and large companies are numerous, and a large percentage of businesses use this type of service abroad. The benefits of cost and time savings, filing of reports and avoiding compliance issues make payroll outsourcing a popular service. Those advantages are multiplied in foreign markets where payroll rules and tax laws are unknown to a new business, and a local payroll provider can be a valuable partner.

Disadvantages example

Outsourcing payroll is a limited, administrative foreign employment solution, and does not guarantee compliance with taxation, immigration or labor laws in the host country. The payroll provider does not offer the foreign company a local employment entity, so incorporation is still required along with registration and other compliance measures. Other practical disadvantages include losing control of compensation and employee data, security issues and lack of service quality or timely reporting. These can be offset by thorough research of the payroll providers in the country and selecting the best firm available.

Examples

With the Electronic Federal Tax Payment System (EFTPS) our firm banks by phone with the government, transferring funds electronically rather than relying on checks to keep our account up to date. If our firm paid more than $200,000 in taxes in any year since 1998, then we are required to pay taxes electronically through EFTPS within the following two years. If for example, our company paid over $200,000 in taxes in 1999, then by January 2001, we must pay taxes electronically. Many payroll services do offer electronic tax payments as part of their package, but in truth, electronic filing is not as difficult as it first appears, and businesses can easily enroll and learn how to do it on their own.